It’s The Velocity, Stupid

Depending on the measurement, inequality (rise in the % of wealth in the top 10%) has increased more under Obama- in spite of policies designed to counter this trend. These policies have been counterproductive, favoring larger industries, stock shareholders, and high finance (Wall Street) over Main Street, small business and the middle class- although some claim the drop in the middle class has been due to their rise upward.

Money creation has caused the increase in inequality because so much of it has been absorbed in the financial realm- It has not been inflationary as so many have expected because of the sharp drop in velocity. According to George Gilder velocity has been the people’s ability to control money that the Fed is not able to control. The people have said in a sense- we do not care how much you stimulate with cheap money- we ain’t buying. People have decided to spend less and the dramatic drop in velocity has kept inflation at bay- leaving us with a quandary that if the economy picks up so does inflation and interest rates and then this debt becomes a very serious problem. I do not know how long the Fed can control interest rates or how much of the low interest rates are due to the stagnation of innovation and productivity.

Increase in money is not inflationary if it parallels increase in productivity in the long run. Wealth is not created by trickle down supply side theory or trickle up demand stimulation nonsense- but by innovation, improvement and betterment.

Milton Freidman’s greatest mistake was his belief that velocity was nearly constant. He proved way off on that one.

Conservatives were wrong about the degree that Obama’s policies would stifle business growth, but the substandard growth 1.2% instead of 3% is problematic – it is world wide. Perhaps we are the tallest midget, perhaps it is because all of the industrialized west are using the same wrong policies, or perhaps we are in a structural transition to a different economy. I am guessing it is some combination of what he can surmise and largely because of factors we cannot surmise until this period passes.

Our economy has many critical advantages that most do not. It is the most diversified economy so even if many sectors are performing poorly others are not. The energy sector had a run while other sectors lagged. We also have a strong self contained demand. We can consume much of our output and are thus less subject to currency swings. We remain the reserve currency in spite of doomers’ prediction to the contrary. And we are still a nation of entrepreneurs in spite of increasing friction costs; it is just in our blood. America is the home of Google, Facebook, Amazon, Apple, Microsoft and hundreds of other game changers. No other country can compare (but Israel comes closest.)

Slower steady growth may be acceptable if it meant more stability, if it was more evenly distributed and if there was some other acceptable means of reducing the debt.